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5 Deathbed Stocks?

Are these companies dead -- or just dead-ish?

We’ve all heard of the “death rattle,” the last gasp from a lost soul’s lungs. Sometimes, we seem to hear it from the companies in which we invest. Revenues dry up. Margins contract. Profits evaporate. All these signs suggest that their condition is worsening -- a financial death rattle, if you will.

Stocks in sick bayDon’t assume that all such companies are goners. Some will barely cling to life, while others will make a full recovery. Here, though, we’re seeking companies that have all but given up the ghost.

For help, we’ll turn to the clever coroners at our 135,000-strong Motley Fool CAPS community, where members give the thumbs-up or thumbs-down to some 5,300 stocks. We’ve unearthed a handful of stocks that look like they might be headed six feet under -- primarily based on their one-star ratings -- and we'll head over to CAPS to measure their opinions on a company's prospects.

Then we’ll palpate their pulses with some quick tests for liquidity -- who knows, maybe we'll still find some signs of life! The current ratio and quick ratio (also called the “acid test” ratio) give us an idea of a company’s ability to pay its bills, and the Altman Z-Score suggests companies in danger of bankruptcy. Companies scoring 3.00 and above are considered safe, between 2.70 and 2.99 are “yellow flags,” between 1.80 and 2.70 have a good chance of going bankrupt within two years, and those with scores below 1.80 mean the Cryptkeeper is waiting.

Here’s today’s list. The question is, with our primary screen being one-star status given by CAPS investors, are these companies only partly dead, or have they given up the ghost?

We obviously don’t know if these companies are headed six feet under, so don’t short them based on their appearance here. Moreover, some companies -- like software makers and financials -- don’t neatly fit into the Altman Z-Score scale. Yet like the mythological figure of Charon conducting souls across the River Styx to the netherworld, we'll use the CAPS community as our guide to determine whether these stocks are destined to seriously underperform the market, or if they can come back to beat expectations.

Whistling past the graveyardWith 164 dealership franchises around the country, Sonic Automotive is one of the largest car dealers in the nation. Last month, it reported that profits plummeted 87% as sales of both new and used cars fell in the worst markets the company has seen. It notes, however, that income from continuing operations actually resulted in profits of $5.4 million, or $0.13 a share.

Where CarMax(NYSE:KMX) profits from used-car sales, AutoNation(NYSE:AN) and Sonic derive the bulk of their vehicle revenues from new-car sales. Sonic, in fact, gets only about 25% of its car-sale revenue from used cars. So Sonic's announcement a few weeks ago that it expected to see the biggest increase in used-car sales in May is helpful, but not particularly meaningful.

Nor should it expect the recently passed "cash for clunkers" bill to help it out much. While car buyers would qualify for as much as a $4,500 credit for trading in a used gas-guzzler in exchange for a new, fuel-efficient model, there's probably going to be little incentive to actually do so. Cars would have to be worth less than $4,500 to make the exchange worthwhile -- else the owner would just sell it on his own for more -- and individuals driving such hoopties may not have the cash to meet the car payment a new ride would impose.

Sonic caused a tremor in the markets last month when its stock soared some 200%, but that just left many investors feeling incredulous. CAPS member NoDoughBro wondered how it could soar when GM was crumbling, while Scoobrs thought penny-pinching consumers would impede its ability to service the substantial debt it holds. "Bankruptcy is just around the corner. Sales will pick up, but consumers will be far too frugal to cover their costly debt service."

Rattling the cageAre these companies doomed to drag their investors into an underworld of underperformance? Or will they be resurrected to stalk the markets once again? It pays to start your own research on these stocks at Motley Fool CAPS. Read a company’s financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made, all from a stock’s CAPS page. Sign up today, absolutely free, and let us know whether you think the Grim Reaper’s at the door.

Fool contributor Rich Duprey does not have a financial interest in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool’s disclosure policy remains vibrant and full of life.

Author

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.